Difference Between Equity and Preference
Shares
When
you begin your investing journey, you come across a variety of financial terms.
It is crucial to understand these terms for more informed decision-making and
to ensure a smooth investment journey. One such concept is equity shares and preference shares.
A
company’s share capital is classified into two types - equity shares and preference shares. Both of these share types have different features and are suitable for
investors with different requirements. Therefore, it is important to learn the
difference between equity shares and preference shares.
Equity shares are the ordinary
shares or regular shares of a company offered to the public usually to raise
capital for the expansion of business. When we speak about investing in stocks,
we normally refer to equity shares. When you buy equity shares of a company,
you become the owner of that company proportional to the value of shares held
by you.
Preference shares also referred to as preferred
stocks are the shares of a company’s stock that enables its holders to receive
some additional benefits in terms of dividend sharing compared to equity
shares. They enjoy preferential rights to the company’s profits and assets.
Equity
Shares vs Preference Shares
Below-mentioned
are the prominent differences between equity shares and preference shares.
|
Factors
|
Equity
Shares
|
Preference
Shares
|
|
Definition
|
Equity shares are the ordinary shares of the
company that represent the part ownership of the shareholder in the company.
|
Preference shares are the shares that carry a
preferential right for the shareholder in the matters of payment of dividend
and repayment of capital.
|
|
Return
|
Equity shareholders receive a return in the
form of capital appreciation.
|
Preference shareholders receive a return in
the form of regular dividend income.
|
|
Dividend Payout
|
Equity shareholders receive dividends after all of the liabilities
have been paid and only after the preference shareholders receive
their dividends.
|
Preference shareholders get the priority to
receive dividends before equity shareholders.
|
|
Dividend Rate
|
The rate of dividend for equity shareholders
varies depending on the company’s performance and earnings. A company
can even decide not to pay any dividend to its equity shareholders for a
particular year.
|
The rate of dividend for preference shareholders is
fixed, irrespective of the company’s performance.
|
|
Company’s Obligation
|
The company has no obligation to pay
dividends to equity shareholders.
|
The company is obligated to pay dividends to
preferred shareholders.
|
|
Mandate to Issue
|
It is mandatory for all companies to issue
equity share capital.
|
It is not mandatory for every company to
issue preference share capital.
|
|
Bonus Shares
|
Equity shareholders are entitled to receive
bonus shares from the company against their existing shareholdings.
|
Preference shareholders do not receive any
bonus shares from the company against their existing shareholdings.
|
|
Voting Rights
|
Equity shares offer voting rights.
|
Preference shares do not offer voting rights.
|
|
Participation in Management Decisions
|
Equity shareholders have voting rights and
therefore they have the power to participate in the management decisions.
|
Preference shareholders are not allowed to
participate in the management decisions.
|
|
Arrears of Dividend
|
Equity shareholders have no claim over the
arrears of dividends from previous years.
|
Certain types of preference shareholders such
as cumulative preference shares can claim arrears of dividends from previous years.
|
|
Capitalization
|
Equity shares have a high chance of over
capitalization.
|
Preference shares have a relatively lower
chance of over capitalization.
|
|
Types
|
The
different types of equity shares are as follows:
- Authorised Share
Capital
- Issued Share Capital
- Paid-up Share Capital
- Subscribed Share
Capital
- Rights Share
- Sweat Equity Share
- Bonus Share
|
The different types of
preference shares are as follows:
- Cumulative Preference Shares
- Non-Cumulative Preference Shares
- Participating Preference Shares
- Non-Participating Preference Shares
- Redeemable Preference Shares
- Non-Redeemable Preference Shares
- Convertible Preference Shares
- Non-Convertible Preference Shares
|
|
Financing Term
|
It serves as a means of long term financing.
|
It serves as a means of medium to long term
financing.
|
|
Investment Denomination
|
Equity shares have a lower investment
denomination.
|
Preference shares have a high investment
denomination.
|
|
Liquidity
|
Equity shares are highly liquid in nature as
they are traded on the stock market. This enables equity shareholders to sell
them off effortlessly.
|
Preference
shares are not liquid in nature. However, the company can buy back
the shares from the shareholders after a fixed period.
|
|
Suitability
|
Equity shares have a high risk of exposure
because of the market’s volatility and company’s performance hence they are
ideal for investors with a higher risk appetite.
|
Preference shares do not possess such threats
and are thus considered safer than equity shares. They are ideal for
risk-averse investors.
|
|
Redemption
|
Equity shares cannot be redeemed except under
a scheme involving a reduction of capital.
|
Preference shares can be redeemed.
|
|
Convertibility
|
Equity shares cannot be converted.
|
Preference shares can be converted to equity
shares.
|
|
Capital Repayment
|
In the event of the winding-up of the
company, equity shares are reimbursed at the end.
|
In the event of the winding-up of the
company, preference shareholders are reimbursed before the equity
shareholder.
|
The Bottom Line
Both equity shares and preference shares benefit in
different ways. While equity shares offer voting rights and entitle you to
participate in the company’s decision-making, preference shares offer an upper
hand when it comes to the distribution of dividend.
As an investor, you can choose to invest in equity shares or
preference shares depending on your risk-taking ability and financial goals.
To get more updates related to stock market. Indira Securities provides the best trading platform across central India.